• Dow Jones Industrial Average (DJIA) futures fell 88 points in premarket trading Wednesday.
  • Microsoft reports earnings tonight and there isn’t much room for error.
  • After driving the entire market higher, any disappointment in tech earnings could bring it crashing down.

If the stock market is priced to perfection, then Microsoft (NASDAQ: MSFT) needs a home run when it reports earnings tonight. Investors are a little nervous going into today’s session, with Dow Jones Industrial Average (DJIA) futures falling 88 points on Wednesday.

It’s no stretch to say that Microsoft’s quarterly update is a big moment for the entire stock market. Tech has lead the rebound since the March selloff. Now it needs to come through with cold, hard numbers.

Tech stocks have an outsized impact on the entire stock market right now. Source: Bank of America / Bloomberg

Any disappointment could ripple through the entire market. Especially when you consider that Microsoft, Apple, Google, Amazon, and Facebook now make up ~25% of the entire S&P 500.

Of course, the opposite is also true. A surprise to the upside could see tech stocks run even higher.

Dow futures tumble overnight

After yesterday’s strong session, Dow futures took a breather overnight, heading 88 points (0.31%) lower on Wednesday.

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Dow Jones Industrial Average (DJIA) futures fall ahead of Microsoft earnings. Source: Yahoo Finance

S&P 500 futures slipped 0.38% while Nasdaq futures fell 0.2%.

Microsoft is the most expensive in 20 years

Microsoft hasn’t been this expensive going into earnings since the dot-com bubble. So there isn’t much room for error in tonight’s update.

But does this expensive valuation matter? As CEO Satya Nadella said in the last earnings call, we’ve just witnessed “two years’ worth of digital transformation in two months.” Perhaps the valuation reflects that shift.

Brian Belski Of BMO Capital Markets isn’t worried about tech valuations:

Clearly [tech is] leading, but they’re leading for a good reason. They are fundamental, secular, category killers. They were strong before Covid, during Covid, and they’re going to be strong after Covid.

Everyone is desperate to compare today’s market to the dot-com bubble. But the fundamentals are completely different now, argues Belski. He said the bears need “more imagination.”

Stock market sees temporary rotation out of tech

The Dow outperformed the Nasdaq yesterday in a tell-tale sign of market broadening. Investors rotated out of tech and into cyclicals and value stocks. This is something Francis Tan UOB has been advising lately.

I have been suggesting to clients to take some profits off the table in the US technology sector.

Does this mean a bigger tech selloff is coming? Not necessarily. Jeff Tomasulo at CEO Vespula Capital thinks it’s a welcome move.

That’s actually really healthy for the markets. People start to take profits in stuff that has gone up tremendously and starts to put it into areas they find value, and that’s small cap and the S&P 500.

Dow awaits Microsoft’s earnings

Expect volatility when Microsoft reveals its fiscal 4th quarter results. Options traders are pricing in a 4% move either way for the stock and it could dictate the next big wave of capital flow.

Investors might double down on tech if the results surprise to the upside. Or they might flee the sector if earnings disappoint.

Wall Street is expecting earnings of $1.38 per share on $36.64 billion revenue. However, the ‘whisper number’ is $1.50 so the bar is high.

The early signs from the sector are good after IBM beat expectations earlier this week. High demand for cloud services across the board is likely to benefit Microsoft, whose cloud business grew 59% last quarter.

Tesla also reports earnings after the bell tonight.

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